Another large bank has paid another large settlement for its behavior before the financial crisis. Bank of America has agreed to pay $16.65 billion to end civil investigations into sales of mortgage-backed securities by Bank of America, Countrywide, the mortgage company it bought in early 2008, and Merrill Lynch, the investment bank it purchased at the height of the financial crisis later that year.
Of the $16.65 billion, some $9.65 billion will be in cash penalties, and the remaining $7 billion will be in consumer relief and compensation. The settlement also covers civil claims against the bank by federal prosecutors, the Securities and Exchange Commission, and several state attorney generals, including New York, California, and Illinois. Bank of America's profit in 2013 was $11.43 billion.
"Bank of America has acknowledged that, in the years leading up to the financial crisis that devastated our economy in 2008, it, Merrill Lynch, and Countrywide sold billions of dollars of RMBS backed by toxic loans whose quality, and level of risk, they knowingly misrepresented to investors and the U.S. government," Attorney General Eric Holder will say this morning in prepared remarks. "These loans contained material underwriting defects; they were secured by properties with inflated appraisals; they failed to comply with federal, state, and local laws; and they were insufficiently collateralized."
Bank of America will pay a $5 billion civil penalty to the Justice Department, $1.8 billion to settle other fraud claims from federal prosecutors, just over $1 billion to the Federal Deposit Insurance Corporation, $136 million to the SEC, and $943 million to the states.
Also, Bank of America will devote some $490 million to help pay taxes incurred by homeowners who receive debt relief as part of the deal. Debt relief, like reducing the principal of a home mortgage, can actually raise the taxes of the person whose debts are being reduced. Holder urged Congress to extend the Mortgage Forgiveness Debt Relief Act of 2007, which gave homeowners tax relief from loan principal reductions but expired at the end of last year.
Bank of America said the settlement will drag down its pretax earnings in the third quarter by some $5.3 billion, or 43 cents a share. Bank of America's shares were up slightly in early trading to $15.63.
"We believe this settlement, which resolves significant remaining mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future," Bank of America CEO Brian Moynihan said in a statement.
Bank of America joins its megabank rivals JPMorgan Chase and Citigroup in reaching a massive settlement in the last year as part of the Justice Department's effort to investigate the mortgage industry's behavior leading up to the financial crisis. The scale and composition of Bank of America's settlement mark an evolution in the Justice Department's approach to its mortgage investigations, namely in demanding larger hard cash payments in the form of civil penalties.
In November, JPMorgan reached a $13 billion settlement with the Justice Department, which included a $2 billion civil penalty and $4 billion in aid to consumers damaged by the housing collapse. Citigroup reached a $7 billion settlement that included a much larger cash component — a $4 billion penalty — along with over $2 billion in consumer aid.
The settlements have been criticized by some for largely punishing shareholders and not going after individual executives involved in the packaging and selling of mortgage-backed securities before the financial crisis. They've also been criticized as being too tilted towards consumer relief and compensation, which some consider to be less of a real penalty because banks tend to already be engaged in some consumer assistance efforts.
Bank of America's larger bill reflects the scale of its mortgage and mortgage-backed securities businesses before the financial crisis, especially that of Countrywide, the southern California mortgage company it purchased in 2008, which was the largest mortgage lender in the country before it almost collapsed during the housing bust.
"I want to be very clear: The size and scope of this multibillion-dollar agreement go far beyond the 'cost of doing business,'" Holder said. "This outcome does not preclude any criminal charges against the bank or its employees."
Earlier this month, it was ordered to pay $1.3 billion after it lost a civil case over a Countrywide mortgage origination program nicknamed "Hustle." The judge in that case described the program as a "vehicle for brazen fraud."